Shareholders back demutualisation of Stock Exchange

Nigerian shareholders have expressed supports for the demutualisation of the Nigerian Stock Exchange (NSE), describing the release of the draft rules for the demutualisation by the Securities and Exchange Commission (SEC) as a step in the right direction. NSE is Nigeria’s only regular securities exchange. Securities and Exchange Commission (SEC), two weeks ago, released the draft rules for demutualisation of securities exchange.

Shareholders’ leaders who spoke to The Nation said the demutualisation of the Exchange would open up the marketplace for popular ownership and enable minority shareholders who have been part of the growth of the market to benefit from ownership of the market.

Chairman, Ibadan Zone Shareholders Association (IBZA), Chief Sola Abodunrin, said demutualisation portends good omen for the Nigerian stock market as the NSE can now truly become a national institution in terms of ownership.

National coordinator, Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, said the demutualisation of the Exchange will open up opportunity to minority retail shareholders to be part of the market they had contributed to.

According to him, the demutualisation should be inclusive and should encourage participation by the generality of the people including shareholders that have been major stakeholders in the market.

He said shareholders were in support of a provision in the draft rules for the demutualisation, which limits the maximum allowable equity stake for any individual or entity in the demutualised exchange to five per cent.

“I think it is good for the shareholders, they should allow everybody to participate in the ownership, we are the growers of the market and we should be able to participate in the fortunes we have created. They should however ensure that nobody, no matter how big you are, should own more than five per cent in the Exchange,” Nwosu said.

President, Constance Shareholders Association of Nigeria, Shehu Mikhail, described demutualisation as one of the best things to happen to the Exchange noting that it will create opportunities for the general investing public and also for the NSE itself.

Demutualisation is the process of changing a member-owned stock exchange, otherwise known as mutual exchange, to a corporate entity owned by shareholders. In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single group, hence the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well.

In a demutualised exchange, the three functions of ownership, management and trading are clearly separated. The draft rules by SEC simply defined demutualisation as “the separation of the ownership of the Securities Exchange from the right to trade on such Securities Exchange”.

The NSE has been locked in intense grip of demutualisation with divergent views on the necessity, procedures and timing and other details of the exercise. The released of the draft culminated a four-year exercise to provide amenable template for the demutualisation.

Established as Lagos Stock Exchange (LSE) in 1960, the stock exchange was conceptualized as a limited by guarantee not-for-profit organisation thriving on the goodwill, reputation and integrity of its members. While Nigeria’s doyen of accounting, Mr. Akintola William, is the only surviving initial signatory to the founding memorandum of the NSE, the membership list of the NSE has always included “the movers and shakers” of the Nigerian economy. Beside stockbroking firms and other capital market operators that are dealing members, members of the NSE currently included Alhaji Aliko Dangote, Chief Ernest Shonekan, Mr. Gamaliel Onosode, Mr. Oba Otudeko, Otunba Adekunle Ojora, Mr. Pascal Dozie, Chief Phillip Asiodu, Rear Admiral Allison Madueke (rtd.) and Senator Udo Udoma among others. Altogether, the NSE has some 360 individual and institutional members including some 255 active dealing members.

Several State Investment Companies are also institutional members of the NSE, giving the States inputs into the operations of the NSE. These included Adamawa Securities Limited, Kaduna Investment Company, Kano State Investment and Properties Limited, Katsina State Investment and Property Development Company Limited, Kwara State Investment Corporation, New Nigerian Development Company Limited, Niger State Development Company Limited, Sokoto Investment Company Limited and Yobe Investment Company Limited among others.

According to the draft of the demutualisation rules, obtained by The Nation, no single entity or person or related entities and persons should be permitted to own, directly or indirectly more than five per cent of the equity and or voting rights in the demutualised securities exchange.

Besides, the rules stipulate that the aggregate equity interests of members of any specific stakeholder group such as stockbrokers and broker-dealer in the demutualised securities exchange should not exceed 40 per cent.

The rules, made pursuant to section 313 of the Investments and Securities Act (ISA) 2007, stipulate that the securities exchange should initiate a process for determining the accurate list of members of the Exchange prior to the commencement of demutualization.

The process of demutualization of the Securities Exchange should include an exchange of membership rights in the Securities Exchange for ownership of shares in the demutualised Securities Exchange.

According to the rules, strategic investors should be given equity interest in the demutualised securities exchange subject to establishment of the facts that the strategic investor has technical expertise through previous experience in managing other Exchanges and the aggregate number of shares to be offered to the strategic investors shall not be more than 30 per cent of issued and fully paid up capital of the securities exchange. However, if the Exchange is in dire need of funds, it could issue a higher number of shares subject to approval of the Commission.

The rules stipulate that the trading participants who are shareholders of the securities exchange shall with effect from the date of demutualization reduce their cumulative shareholdings in the demutualised securities exchange to not more than 10 per cent within five years.

securities exchange and timelines for implementation of necessary structures to ensure the functional separation of commercial and regulatory functions, a detailed five year business development plan for the demutualized Securities Exchange together with the capital expenditure estimates and the sources of finance for the five year period, the manner in which the rights and liabilities of the existing members shall be treated in the demutualization, the procedure for the allocation of shares to the shareholders identified under subparagraphs (c) and (d) and a written declaration that demutualization shall not affect any rights and obligations of the Securities Exchange or render defective any legal proceedings by or against the Securities Exchange.

Besides, the application must include the proposed timelines for the completion of operational manuals to guide the self-regulatory functions of the demutualized Securities exchange detailing the scope of regulatory functions to be performed by the demutualized Securities Exchange, the proposed rules of the demutualized Securities Exchange and the last audited financial statements of the Securities Exchange. However, the Commission may, in writing, require the Securities Exchange to provide any additional information which the Commission may require.

The rules also stipulate the governance model, the resolution of the application and other details.